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RBS Romania Weekly Report No. 41

Inflation surprised again, this time positively: 0.3%mom in October vs. market expectation of 0.6%mom and our forecast of 0.7%mom. In annual terms, it decelerated to 5%yoy from 5.3%yoy due to the slowdown of volatile price inflation (to 12.4%yoy to 17.4%yoy).

The FX reserves reached EUR 31.8bn at the end of October, 0.7bn lower than previous month.

On 2nd November the National Bank of Romania kept the key rate at 5.25% for the fifth consecutive meeting. However, it decided to ensure a “firm”, instead of “adequate” liquidity management.

NBR changed upwards its inflation forecasts, envisaging that annual rate will stay above the variation band of +/-1pp around the central bank target (3% for 2012 and 2.5% from 2013 forwards) until it reaches the upper band of 3.5% at the end of 2013.

Following an increase of 0.9% in August, retail sales fell by 0.4% in September with fuel and food sales contributing to this development.

The decline of civil engineering works determined the fall of construction activity in September (-4%mom). In annual terms construction fell by 6% (nsa).

According to non-adjusted data, industrial production fell by 3.9%yoy in September (amidst a significant decline in manufacturing: -5%yoy). This is the second consecutive month of contraction (after -1.3%yoy in August) and it was determined mainly by weaker demand amongst Romania’s trading partners.

In September only, Romanian exports fell by 8.7%yoy (the highest deterioration since November 2009). But at the same time, the imports also contracted by 7.6%yoy.

The central bank continued to cap the amounts lent to commercial banks through repo operations (at RON 4bn and RON 6bn at the two auctions held since the beginning of the month). The effects on money market rates were observed especially for short-term tenors.

Since the beginning of the month the Ministry of Public Finance held three auctions on the treasury securities market (two 12M T-bill and a 20M T-bond), for all of them raising the entire amounts planned at yield closed to previous auctions with similar maturities.

Starting 31st March 2013 Romania will be part of the flagship Barclays EM Local Currency Government Index, with positive implications for the Romanian domestic bonds’ demand and liquidity.

Mainly supported by local players selling orders the EUR/RON fell by almost 400pips during the first five trading sessions of November to 4.5029 – that proved to be an important support level.

The EUR/USD closed last week at 1.2708, 250pips lower versus the beginning of the month – the factors contributing to this decline coming from the both sides of the Atlantic.